Verdict: A complex model – part tech, part VC

IPO Snapshot:

Xelpmoc Design and Tech is entering the primary market on Wednesday 23^rd January 2019 to raise Rs. 23 crore, via fresh issue of equity shares of Rs.10 each in the price band of Rs. 62 to Rs. 66 per share, with retail discount of Rs. 3 per share. Despite the tiny offer size, listing is on main board (not SME). Representing 25.46% of the post issue paid-up share capital, company will issue 35 lakh new shares at the upper end of the price band, with allocation ratio of 75:15:10 between institutional, HNI and retail investors respectively. Issue closes on Friday 25^th January and listing is likely on 4^th February.

Company Background:

Xelpmoc, reverse for complex, provides technology and data science services to start-ups, making small investments in them, as well as a venture capitalist (VC). While the company itself can be termed as a start-up, having established only in 2015, preferring growth over profitability and reporting annual net loss of Rs. 3.5 crore on revenue Rs. 5 crore (FY18).

P&L in the red

While the company guides on turning into the green in the ‘near-future’, this looks far-fetched a target considering the weak P&L - On FY18 consolidated revenue of Rs. 5 crore, there was net loss of Rs. 3.4 crore. Since depreciation is negligible (on lack of fixed assets), even on cash profit basis, it was negative at Rs. 3.5 crore. H1F19 revenue of Rs. 3.6 crore lead to net loss of Rs. 2.3 crore, leading to negative EPS of Rs. 2.22. Till date, from FY16 to H1FY19, company has registered net loss of over Rs. 10 crore.

Objects of Issue

Company plans to spend Rs. 4.1 crore on fit-outs and Rs. 5.5 crore on hardware and network equipment for new development centers in Kolkata and Hyderabad in FY20. Another Rs. 6 crore is earmarked for working capital, aggregating need of Rs. 15.6 crore of funds. Balance Rs. 7.4 crore will go towards general corporate purposes and issue expenses.

Shareholding Pattern:

Post 55:100 bonus in July 2018, current equity stands at Rs. 10.52 crore, of which, promoters own 78.13% and 45 members of the public (mainly friends and family) own balance 21.87%. This will be company’s 3^rd dilution in last 15 months – earlier Rs 3.6 crore raised in 2018 and Rs 4 crore in Nov 2017. Assuming price discovery at Rs. 66, post-listing promoter shareholding will drop to 58.24%, while pre-IPO investors will own 16.30%.

Tech company or VC fund?

In FY17 and FY16, two book entries of Rs.13.7 crore and Rs. 3.7 crore respectively, towards fair valuation of investments, under IndAS, routed through the reserves, made the net worth positive at Rs. 17.6 crore. Caution is drawn since these may not be realizable value, as all these investments are in the unlisted space.

If not for the revaluation of Rs. 2.15 crore investment in 11 client companies to Rs. 19.42 crore, company’s entire net worth would have been practically wiped off. Thus, balance position is very precarious as it is resting on the laurels of a couple of investments doing well. While the company calls this opportunistic and doesn’t rule out such strategic investments in the future, one wonders if this is a technology company or a venture capital fund – as both have different business models with diverse risk-reward profiles.

Valuation:

It is surprising that the company is not getting a VC investor on-board for such a small amount of funds. As post-listing on the stock exchanges, it will be a micro-cap stock, with market cap of only Rs. 90 crore. This may weigh both on the market liquidity and investor interest and may also make the share price susceptible to operator play. 

Given short and weak operating history, company cannot be valued on the regular price-to-earnings multiples - a general practice for IT companies. Given part-model of being an early stage investor, market may also find it difficult to take a valuation call on the stock. The Rs. 3 discount may also not be sufficient to attract retail investors, whose confidence in market is a little shaky before the general elections, when blue-chips are also struggling to deliver returns.

Confidence in core operations missing:

On one hand, company does not want to cash in on the upside on its investments – Rs. 3.5 crore invested in a logistics company is 4x (notionally) in 3 years, but is willing to dilute a significant portion (25%) of its own equity at such an early stage in its life cycle. In simple words, it is more bullish on its investments rather than its core operations of technology services. In such a scenario, why should investors bet on the company and its core operations?

An IBM study states that 90% of Indian start-ups fail within 5 years of inception, implying success rate of start-ups is barely in single digit. Hence, chances of all its investments fructifying are very bleak. Even if one of its investments become multi-baggers, it will be a one-off and treated as exceptional gain by secondary market investors, as and when realised. Thus, this company is more complex that it seems, with an operating model of part-tech and part VC.  

Conclusion: Micro cap stock, limited operating history, struggling P&L, hybrid operations of technology and venture capital fund make this a risky bet in the current secondary market conditions. Hence, it is best avoided.

Grey Market Premium (GMP) of Xelpmoc: Grey Market Premium of Xelpmoc is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No interest.